Santa Clara’s $34 Million Forecast Budget Shortfall: There Will Be Pain

That’s the message of the City of Santa Clara’s recently released 2020-2021 operating budget overview. “Given that our resources are considerably lower than other agencies, reductions will have a significant impact to service levels,” Santa Clara City Manager Deanna Santana wrote in the overview.

To get a feel for the magnitude of the budget cuts Santa Clarans will face in the next four years, consider: The five-year $34 million shortfall is equal to the entire Parks and Recreation Department, half the Fire Department or one-third of the Police Department.

Two thirds of the revenue shortfall — nearly $23 million — hits in the coming fiscal year. The largest shortfalls are in sales and hotel taxes — $5.6 million and $6.8 million respectively. Property tax, which is less affected by economic conditions, is nonetheless forecast to be down almost $2 million.

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The cancellation of classes and recreation center programs will add up to just short of another $1 million in lost revenue, and lower interest rates will take another $1.8 million bite out of the City budget.

With no events in Levi’s Stadium, the City will also lose ticket fee that benefitted senior and youth services as sales taxes. Prior to the pandemic, revenue from big non-NFL events like concerts had dropped to next to nothing from $2-$4 million a year.

Because the City must have a balanced budget, $22.7 million will be transferred from the Budget Stabilization Reserves, which are currently at $70 million, according to a recent City Manager report. This is a temporary measure, however, City Manager Santana noted, until a new budget is approved.

$7M – $10M in One-Time Cuts, $8M – $12M in Ongoing Cuts

Several cuts are already in place, including a hiring freeze, overtime controls, as-needed staff, travel, and IT and vehicle purchases. These will continue through the next year for additional one-time savings.

The real hit to City services will come in the form of cuts in personnel costs — about 75 percent of the General Fund.

Reducing overtime and eliminating vacant positions yields between $6 million and $8 million, and layoffs aren’t off the table. “We will evaluate all positions funded by the General Fund,” wrote Santana, “[which] will require an evaluation of service levels and service delivery methods to identify potential reductions.”

The City is also looking at union contracts — Memorandums of Understanding (MOU). “Savings will be required in order to prevent additional service reductions and/or layoffs,” Santana wrote.  During the Great Recession all but one City union accepted furloughs, which reduce payroll but don’t affect pensions.

Another $1 million to $2 million can be realized by cutting outside supplies and services. The City will also look at reducing General Fund revenue that’s going into other City funds — for example, capital improvements, reserves, housing and cemeteries.

Increasing Fees

Overall the City’s cost of services is higher than the fees charged for those services, although “full cost recovery” always comes up in the annual discussion of fees. The most recent fee study shows Santa Clara recovering slightly more than 50 percent of its service costs, with the City “subsidies” adding up to about $22 million.

Some of these subsidies include (per each): Library room rentals ($84), burials in City cemeteries ($1,000 and up), replacing library cards ($3), special events permits ($166), taxi driver application ($818), commercial building electrical permits ($0.21/square foot), and Additional Dwelling Unit plan check and inspection ($1,564). (Source: SantaClaraCA.gov).

After about a year of discussion on raising the City’s hotel tax, at its May 27 meeting, the Council ultimately decided not to raise the $1 per night tax, postponing the question for a future time.

Service Cuts

Although no specific service cuts have been discussed, they’re under consideration for just about every City department. Here are some of the things that residents might see in the coming year according to the budget overview (list is in no particular order):

• Longer Fire Department paramedic response time and more apparatus out of service
• Lower Police Department minimum staffing
• Longer planning and code enforcement response times
• Reduced library hours and fewer programs
• Lower funding for outside groups
• Reduced or deferred infrastructure maintenance
• Fewer Parks and Recreation programs and community events
• Reduced levels of service from the City Clerk, City Attorney, City Auditor, and City Manager

Wildcards 

Other factors could make Santa Clara’s budget problem worse.

A prolonged economic downturn would depress all General Fund revenues, especially volatile revenues like sales and hotel tax, and eventually reduce the more stable property tax revenue.

Pension costs are another unknown. CalPERS has reduced its exposure to volatile investments since the dot-com bust, but nonetheless reported a 0.4 percent loss in the first quarter of this year instead of the projected 7 percent gain.

Santa Clara’s pension costs nearly doubled in the aftermath of the last economic crisis — the Great Recession. CalPERS’ investment losses, combined with a reduction in the time allowed for paying up unfunded liabilities, more than doubled the City’s pension costs to $50 million from $19 million since 2010.

The giant pension fund’s losses directly affect the City’s contribution rates because promised benefits remain the same, regardless of the retirement fund’s returns. Thus, a decline in the value of an agency’s contribution increases the agency’s unfunded liability. In 2019 Santa Clara’s unfunded pension liability was $516 million.

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